UK: Brexit's Impact On The Insurance Industry

Following the UK's historic advisory vote to leave the EU,
key questions must be answered before any real change occurs. These
include: Must the government implement the advisory vote, and if
so, how?

Will the UK really leave the EU? Will Scotland and Northern
Ireland (both of which voted to remain in the EU) have their own
referendums to leave the UK—and will they be granted EU
status if they do?

While the answers to these questions will have broad
implications for businesses across industries, this article
addresses insurance companies, many of which are trying to
determine whether to leave the UK or remain until the UK's
plans become clearer. At this early stage, insurance companies,
regardless of their location or the type of coverage they write
(e.g., property and casualty, life, or accident and health), lack
the information needed to make decisions. Regardless, they should
start weighing potential scenarios. We suggest they evaluate
considerations including the following:

Domicile for European Business

Should insurance companies immediately seek another EU country
to domicile their European business or take a wait-and-see
approach? U.S. companies that use London as their European base may
find a move necessary to maintain unfettered access to the EU. As
English-speaking countries, Scotland and Ireland (including
Northern Ireland) may become attractive options. Additionally,
these countries may seek to enact tax and related legislation to
entice companies from London. Although some recent EU tax rulings
may make this difficult.

Solvency II

The Solvency II Directive ("Solvency II") codifies and
harmonizes EU insurance regulation and primarily concerns the
amount of capital EU insurance companies must hold to reduce the
risk of insolvency. Under Solvency II, the solvency regimes of
countries outside the EU are assessed to determine whether they are
"equivalent" to those of the EU. If the UK leaves the EU,
it would, absent a contrary agreement, no longer be an equivalent
country. This would put it on similar footing with the United
States (though not an equivalent nation, certain aspects of
equivalency have been offered to the United States by the
regulatory authority responsible for Solvency II, the European
Insurance and Occupational Pensions Authority).

Since the International Association of Insurance Supervisors has
chosen Solvency II as a baseline for development of a global
safety-and-soundness standard, the UK would be subject to a similar
level of standards from global bodies. However, it has been argued
that, if the UK exits the EU, the UK would be free to remove any EU
regulations that damage the UK economy. Solvency II drove
significant business opportunity in the bulk annuity buy-out
market. Insurers are being forced to restructure their balance
sheets, prompting the sale of billions of pounds of annuity books.
Thus, it is unlikely Brexit will impact the Solvency II regulation
since that would require insurance companies to restructure their
books of business yet again.

European Economic Area

The European Economic Area (EEA) is the area in which the
Agreement on the EEA provides for the free movement of persons,
goods, services and capital within the European Single Market. If
the UK negotiates some form of agreement allowing it continued
access to the EU market, while closing its borders to immigrants,
the amount and type of change is still open to question; there may
be little or none. However, at this point, it appears EU
politicians are adamant that immigration and access to the EEA go
hand in hand, i.e., you cannot get one without the other. If that
view controls, little would likely change for companies located in
the UK.

Reverting to World Trade Organization Rules

Absent a federal trade agreement covering services with the EU,
financial services firms, including insurance companies, licensed
in the UK will face the same barriers to EU entry as non-EU
countries. As a result, the UK's insurance firms will have to
establish branches within individual EU member states, and comply
with EU regulations, capital requirements, and employment laws.

Companies with UK Parents

With the pound losing strength, the financial stability of the
entire business entity could be at risk. Insurance companies should
examine and adjust their enterprise risk management systems.

Passporting

Through the practice of "passporting," firms
registered in the European Economic Area (EEA) can do business in
any other EEA state without obtaining further authorization in each
country.

If the UK leaves the EU, insurance companies that use their UK
license to write risks in other EU countries will be required to
get licenses in the other countries. In addition, companies that
use passporting to enter the UK will have similar concerns, and may
be required to obtain UK licenses. As London is among the
world's largest insurance hubs, this issue may present
significant challenges.

Some Additional Considerations

Cybersecurity

Data privacy issues (e.g., which
standard will be followed the UK, the EU, both, or another
country's?)

Will the UK remain on the National
Association of Insurance Commissioners' list of qualified
foreign jurisdictions for doing business in the United States?

Tax implications once the UK is no
longer part of the EU VAT system

Will the UK vary its anti-money
laundering directive, and if so how will entities doing business in
the UK be impacted?

Conclusion

The only certainty is that the relationship between the UK and
the EU will change. We won't have answers to the many questions
raised by Brexit until the UK exercises its right to withdraw from
the EU pursuant to Article 50 of the Lisbon Treaty, at which point
the two-year clock begins to run. For now, the best strategy is to
allow the politicians and government entities to determine their
strategies.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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The English Court of Appeal has considered for the first time in Ted Baker Plc v Axa Insurance UK Plc [2017] EWCA Civ that there are circumstances in which insurance companies will be under a duty to...

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